[2024] KETAT 140 (KLR)

Koceyo v Commissioner of Domestic Taxes (Appeal 967 of 2022) [2024] KETAT 140 (KLR) (9 February 2024) (Judgment)

Neutral citation: [2024] KETAT 140 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 967 of 2022

E.N Wafula, Chair, RO Oluoch, Cynthia B. Mayaka, AK Kiprotich, E Ng'ang'a & B Gitari, Members

February 9, 2024

Between

Titus Otieno Koceyo

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is an individual taxpayer running various small-scale business in Nairobi including sole proprietorship law firm and real estate commission and agency brokerage.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and the Kenya Revenue Authority is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. On 23rd August 2021, the Appellant received a notice from the Respondent to assess undisclosed business income and undeclared Value Added Tax.

4. On 30th August 2021, the Appellant responded to the Respondent’s notice of assessment and attached the relevant documents explaining his tax filings.

5. Subsequently, in a letter dated 5th October 2021, the Respondent issued a notice of assessment to the Appellant based on noted variances between sales declared in its VAT and Income-tax returns for the period 2018-2020. The additional tax due from the Appellant was Kshs. 44,742,361. 00.

6. In the same letter the Respondent requested the Appellant to object through the iTax profile within 30 days.

7. The Appellant received the tax demand on their iTax profile on 12th December 2021 and soon thereafter lodged an objection in a letter dated 14th December 2021 and received by the Respondent on 15th December 2021.

8. The Respondent alleged that it engaged in various communication with the Appellant for the period between 15th December 2021 up to and including 9th August 2022.

9. The Respondent issued an objection decision on 29th August 2022, wherein the Respondent ordered the Appellant to make immediate payment of the amended assessed amount of Kshs. 44,742,361. 00.

10. The Appellant being dissatisfied with the Objection decision lodged a Notice of Appeal dated and filed on 7th September 2022 to the Tribunal.

The Appeal 11. The Appeal is premised on the Appellant’s Memorandum of Appeal dated 7th September 2022 and filed on the same date, the Appellant premised its Appeal on the following grounds: -a.That the Objection decision is invalid because it was not made and communicated within 60 days of a valid objection having been lodged by the Appellant on 15th December 2021 contrary to Section 51 (11) of the Tax Procedures Actb.That the effect of failing to respond to the Objection lodged by the Appellant within 60 days from 15th December 2021, resulted in the Objection being allowed by operation of the law pursuant to Section 51 (11) of the Tax Procedures Act;c.That the Respondent erred both in fact and in law, in failing to find that the Objection having been allowed by operation of the law, the Respondent had no further jurisdiction to entertain the Objectiond.That the Respondent erred both in fact and in law, in acting in excess of its jurisdiction in purporting to issue an Objection decision which had long been allowed by operation of the law, hence deciding which is nullity ab initioe.That the Respondent erred both in fact and in law when it disregarded binding judicial precedents availed to it to the effect that Section 51(11) of the Tax Procedures Act is couched in peremptory and mandatory terms that it had no jurisdiction to render a decision after 60 days from the date of filing the Objection, The Objection having been filed on 15th December 2021 the Jurisdiction of the Respondent to decline the Objection lapsed on 16th February 2022. f.That the Respondent erred both in fact and in law, when it misapplied and mi sinterpreted the mandatory provisions of Section 51(11) of the Tax Procedures Act that correspondences exchanged with the Appellant subsequent to the expiry of 60 days would override the law and revive an extinguished cause of action.g.That the Respondent erred both in fact and in law, in failing to find that being a creature of Statute, it had an obligation to respect and enforce the provisions of Section 51(11) of the Act in favour of the Appellanth.That the Respondent's decision violates the Appellant's Constitutional Right enshrined under Article 47 of the Constitution being a right to an administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair by purporting to render a decision 188 day outside the prescribed time limiti.That the Respondent's decision violates the Appellant's statutory right enshrined under Section 4 of the Fair Administrative Actions Act No. 4 of 2015 being a right to an administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair by purporting to render a decision I 88 days outside the prescribed time limitj.That the Respondent erred both in fact and in law when it disregarded binding judicial precedents availed to it in purporting to render a decision on an objection which had long been allowed after 188 days, yet the High Court in Commissioner of Domestic Taxes -vs-Fortune Container Depot Tax Appeal Case No. E060 of 2020 held that a delay of 84 days ousted the Respondent's jurisdiction and in the High Court Case of Equity Group Holdings Limited -vs-Commissioner of Domestic Taxes Civil Appeal No. E069 & E205 of 2020 where a delay of 3 days was deemed to have allowed the Objection.k.That the Respondent's decision of 24th August 2022 is not only unlawful and issued without jurisdiction but also violated the Appellant's legitimate expectation that the Respondent would act in accordance with the law and not revive an objection long allowed by operation of the Lawl.That the Respondent erred both in fact and in law when it disregarded binding judicial precedents availed to it in purporting to render a decision on an objection outside the statutory time limits, yet the High Court in Republic -vs-Public Procurement Administrative Review Board JR Appl. No. 623 of 2016:, High Court in Republic -vs-Public Procurement Administrative Review Board JR Appl. No. 3A & 30 of2020:, Court of Appeal in Joint Venture of Lex Oilfield-vs­PPARB Civil Appeal No. 022 of 2022 where it was held that decisions made outside statutory timelines is without jurisdiction and a nullity.m.That the Respondent erred both in fact and in law when it erroneously and wrongfully split the Appellant's individual PIN Tax obligations by failing to consider that as an individual taxpayer, all the taxes the Appellant declares and pays relates to his total income from his various business activities and not limited to fees earned from professional services only.n.That the Respondent erred both in fact and in law when it erroneously and wrongfully applied Vat on non-vatable income earned by the Appellant in form of commissions and agency fees outside fees earned in his professional work in the years 2018 to 2019. o.That the Respondent erred both in fact and in law when it failed to appreciate that the Appellant’s law firm is a business name under Koceyo and Company Advocates and not a separate legal entity and shares the same PlN as the Appellant and was thus entitled to claim on input purchases both in his own name and as a business name.p.That the Respondent erred both in fact and in law when it erroneously and wrongfully found that there was discrepancy in the income tax returns and Vat returns for the years 2018 and 2019 yet the Appellant had explained the reason being that the income tax returns contained non-vatable items from commissions earned and agency fees.q.That the Respondent erred both in fact and in failing to account relevant facts in the Appellant's income tax returns and the turnover by the Vat returns filed in respect to a difference of Ksh 12,219,424. 00 which had been an invoice erroneously declared in the month of June and July of year 2020, and a valid explanation that the proforma invoice was premature as the matter was still pending in Court and same was later and dully invoiced and paid for in the month of June 2021. The same had been classified as income for the year 2021 in relation to a copy of the Fee Note invoice to the client, Nairobi City County for Kshs. 12,219,424. 00 which was assessed by the client downwards to Kshs. 10,915,600. 00 and paid around 15th June 2021. Also included was the Withholding Vat Certificate No. KRA VWEON003 73146321 issued when the Respondent received the withholding tax from the City County.)r.That the Respondent erred both in fact and in failing to consider the Appellant explanation as above which resulted to double taxation of payment of tax on one invoice due to an explainable error where the invoice was recorded in 2020 but actual payment made in 2021. s.That the Respondent erred both in fact and in law in imposing upon the Appellant VAT assessment of Kshs 22,200,888. 00 for the period January 2018 to December 2020 as per the notice of assessment dated 5th October 2021 yet the Schedule of VAT assessment at page 2 of the letter includes a figure of Kshs. 12,360,649. 00 being an alleged VAT assessment for the period 2021, which conduct amounted to a violation of the Appellant's legitimate expectations and fair administrative action.t.That the Respondent erred both in fact and in law in disallowing the Appellant’s input purchases claims for the period 2020 incurred within the Appellant's course of business towards construction of premises on LR. NO. KAJIADO/KAPUTEI NORTH/6419 and 6420 situated in Kajiado County despite availability of ETR rceipts filed by the suppliers and they relate to construction of commercial premises where the Appellant pays rental taxes.u.That the Respondent erred both in fact and in law in disallowing the Appellant's tax on Motor Vehicle No. KCZ 565M for Kshs. 5,953, 157. 00 claimed on the cost of imported motor vehicle-(Ref: Import Invoice no. 7603770) yet evidence adduced to the Respondent showed that the motor vehicle in question was bought for official use by the Appellant as the proprietor and registered as KCZ 565M under his name wholly used to run his commercial premises and professional services despite availability of a copy of the invoice, tax payment receipts, logbook and insurance sticker.v.That the Respondent erred both in fact and in law in disallowing all the Appellant's Motor Vehicle expenses of Kshs. 726,616. 00 for the period 2020, depreciation of plant and equipment of Kshs. 1,005,480. 00 for 2019 and repairs and maintenance of Kshs. 353,814. 00 for the year 2019 yet the above three costs incurred in the and expenses claimed are allowable expenses and have been incurred in the course of generation the taxable income and tax law has standard rates applicable on capital assets for wear and tear allowable expense claims which rates were applied.w.That the Respondent erred both in fact and in Law in disallowing all the Appellant's Depreciation of Plant and Equipment of Kshs. 1,005,480. 00 for 2019 and Repairs and Maintenance of Kshs. 353,8 14. 00 for the year 2019 and demanded for receipt evidence yet depreciation has no receipt evidence but tax law has standard rates applicable on Capital assets for Wear and Tear allowable expense and thereby discriminated against the Appellant contrary to Article 27 of the Constitution which provides that Every person is equal before the law and has the right to equal protection and equal benefit of the law.x.That the Respondent erred both in fact and in law in disallowing all the Appellant's research costs for the Year 2020 of Kshs. 46,650,055. 00 associated with his legal practice and thus arrived at an irrational and impractical decision that the Appellant's legal practice did not incur any cost to generate the taxable income.y.That the Respondent erred both in fact and in law in failing to properly consider and evaluate the totality of the evidence and documents adduced before it by the Appellant before arriving at its decision.z.That the Respondent erred in law by failing to fairly and objectively consider the Objection raised by the Appellant and predisposed his mind to a position in favour of a finding that the Appellant owed the amount demanded in the assessment.

The Appellant’s Case 12. The Appellant’s case is premised on the Statement of Facts dated 7th September 2022 and filed on the same date.

13. The Appellant stated that he is an individual taxpayer running various small-scale business in Nairobi including sole proprietorship law firm and real estate commission and agency brokerage.

14. That the Appellant’s law firm is a small one-man law firm situated in the Nairobi CBD operating under a business name known as Koceyo and Company Advocates being a business name, the law firm has no distinct and separate legal entity and uses the individual Pin of the Appellant in payment of its taxes.

15. That the Appellant's other small-scale businesses also pays taxes using the Appellant's individual PIN since the Appellant has never incorporated a limited liability Company to run his businesses.

16. The Appellant stated that other than his law firm, his businesses in the real estate involves building rental premises in Kitengela and renting to tenants to which the Appellant pays rental taxes. The other part of real estate business involves where the Appellant brokers for those buying or selling plots and secures a small commission for connecting the two parties.

17. The Appellant stated that he has always paid taxes on all his taxable income and filed relevant returns.

18. The Appellant stated that on 23rd August 2021 he received a notice from the Respondent to assess undisclosed business income and underdeclared Value Added Tax.

19. On 30th August 2021 the Appellant responded to the Respondent’s notice and attached the relevant documents explaining his tax filings.

20. That while the Appellant was waiting for any further engagement from the Respondent or further clarifications if need be the Appellant was shocked to receive in his iTax account on 12th December 2021 a letter dated 5th October 2021 from the Respondent informing the Appellant that the Respondent had completed its review and assessed an additional tax due from the Appellant of Kshs 44,742,361. 00 for the period January 2018 to December 2020 and demanded the Appellant pays the same in 30 days.

21. That the Appellant was aggrieved by this decision and lodged an objection on 15th December 2021

22. The Appellant stated that the Respondent did not determine the Objection within the stipulated 60 days nor did the Respondent engage the Appellant in any correspondence within the stipulated 60 days when the Objection was pending determination.

23. The Appellant stated that after 188 days, i.e. on 29th August 2022, the Respondent purported to deliver an Objection decision to the Appellant outside the stipulated time.

24. That the Objection decision is invalid because it was not made and communicated within 60 days of a valid objection having been lodged by the Appellant on 15th December 2021 contrary to Section 51 (11) of the Tax Procedures Act:

25. That the effect of failing to respond to the Objection lodged by the Appellant within 60 days from 15th December 2021, resulted in the Objection being allowed by operation of the law pursuant to Section 51 (11) of the Tax Procedures Act;

26. That the Respondent erred in fact and in law in failing to find that the Objection having been allowed by operation of the law the Respondent had no further jurisdiction to entertain the objection

27. That the Respondent erred both in fact and in law in acting in excess of its jurisdiction in purporting to issue an objection decision which had long been allowed by operation of the law, hence making a decision which is a nullity ab initio

28. That the Respondent erred both in fact and in law when it disregarded binding judicial precedents availed to it to the effect that Section 5 I (11) of the Tax Procedures Act is couched in peremptory and mandatory terms that it had no jurisdiction to render a decision after 60 days from the date of filing the Objection, The Objection having been filed on I5th December 2021 the jurisdiction of the Respondent to entertain the objection lapsed on 16th February 2022.

29. That the Respondent erred both in fact and in law, when it misapplied and misinterpreted the mandatory provisions of Section 51 (11) of the Tax Procedures Act that correspondences exchanged with the Appellant subsequent to the expiry of 60 days would override the Law and revive an extinguished cause of action.

30. That the Respondent erred both in fact and in law, in failing to find that being a creature of Statute, it had an obligation to respect and enforce the Provisions ,of Section 51 ( 11) of the Act in favour of the Appellant

31. That the Respondent's decision violates the Appellant's Constitutional Right enshrined under Article 47 of the Constitution being a right to an administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair by purporting to render a decision 188 days outside the prescribed time limit.

32. That the Respondent’s decision violates the Appellant’s statutory right enshrined under Section 4 of the Fair Administrative Actions Act No.4 of 2015 being a right to an administrative action that is expeditious efficient lawful reasonable and procedural fair purporting to render a decision 188 days outside prescribed time limits

33. That the Respondent erred both in fact and in law when it disregarded binding judicial precedents availed to it in purporting to render a decision on an objection which had long been allowed after 188 days, yet the High Court in Commissioner of Domestic Taxes -vs- Fortune Container Depot Tax Appeal Case No. E060 of 2020 held that a delay of 84 days ousted the Respondent's jurisdiction and in the High Court Case of Equity Group Holdings limited -vs- Commissioner of Domestic Taxes Civil Appeal No. E069 & E205 of 2020 where a delay of 3 days was deemed to have allowed the Objection.

34. That the Respondent's decision of 29th August 2022 is not only unlawful and issued without jurisdiction but also violated the Appellant's legitimate expectation that the Respondent would act in accordance with the law and not revive an Objection long allowed by operation of the Law.

35. That the Respondent erred both in fact and in law when it disregarded binding judicial precedents availed to it in purporting to render a decision on an objection outside the statutory time limits, yet the High Court in Republic -vs- Public Procurement Administrative Review Board JR Appl No. 623 of 2016:, High Court in Republic -vs- Public Procurement Administrative Review Board JR Appl. No. 3A & 30 of2020:, Court of Appeal in Joint Venture of Lex Oilfield-vs­PPARB Civil Appeal No. 022 of 2022 where it was held that decisions made outside statutory timelines is ,without jurisdiction and a nullity.

36. That the Respondent's decision violates the Appellant's Constitutional right enshrined under Article 47 of the Constitution and Section 4 of the Fair Administrative Actions Act being the right to administrative action that is efficient, lawful, reasonable and procedurally fair when the Appellant subjected the Appellant to multiple and overlapping Audit Assessments in respect lo similar items and in respect lo same financial period.

37. That the Respondent erred both in fact and in law when it erroneously and wrongfully split the Appellant's Individual PIN Tax Obligations by failing to consider that as an individual taxpayer, all the taxes the Appellant declares and pays relates to his total income from his various business activities and not limited to fees earned from professional services only.

38. That the Respondent erred both in fact and in law when it erroneously and wrongfully applied Vat on non-vatable income earned by the Appellant in form of commissions and agency fees outside fees earned in his professional work in the years 2018 and 2019.

39. That the Respondent erred both in fact and in law when it erroneously and wrongfully found that there was discrepancy in the income tax returns and Vat returns for the years 2018 and 20I9 yet the Appellant had explained the reason being that the income tax returns contained non-vatable items from commissions earned and agency fees.

40. The Appellant stated that one of his clients in the legal practice is the Nairobi City County. Upon instructions and filing of initial pleadings the Appellant would prepare a Fee Note to the Client but as in ordinary practice the client would take several months before settling the same.

41. The Appellant stated that one of the cases he handled for Nairobi City County was one of the disputed assessments by the Respondent. The Appellant acted Nairobi City County in High Court ELC Case No. 561 of2009 KPLC-vs NCC whereby the Appellant's Fee Note was paid in June 2021.

42. That the Appellant's other small-scale businesses also pays taxes using the Appellant's individual PIN since the Appellant has never incorporated a limited liability Company to run his businesses. He had been erroneously captured in the income tax returns before actual payments were received. This caused a variation between income tax and VAT returns. When actual payment was received, VAT returns were duly paid including withholding tax by the client. These documents were duly presented to the Respondent but it refused to consider the same.

43. That the Respondent erred both in fact and in failing to take into account relevant facts in the Appellant's Income tax returns and the turnover by the Vat returns filed in respect to a difference of Ksh 12,219,424. 00 which had been an invoice erroneously declared in the month of June and July of year 2020 and valid explanation that the proforma invoice was premature as the matter was still pending in Court and same was later and dully invoiced and paid for in the month of June 2021. The same had been classified as income for the year 2021 in relation to a copy of the Fee Note Invoice to the client, Nairobi City County for Kshs. 12,219,424/= which was assessed by the client downwards to Kshs. 10,915,600/= and paid around 15th June 2021). Also included was the withholding Vat certificate No. KRA VWEON00373146321 issued when you received the withholding tax from the City County.)

44. That the Respondent erred both in fact and in failing to consider the Appellant’s explanation as above which resulted to double taxation of payment of tax on one invoice twice due to an explainable error where the invoice was recorded in 2020 but actual payment made in 2021

45. That the Respondent erred both in fact and law imposing upon the Appellant VAT assessment of Kshs. 22,200,888_/= for the Period January 2018 to December 2020 as per the Notice of Assessment dated 5th October 2021 yet the Schedule of VAT assessment at page 2 of the letter includes a figure of Kshs. 12,360,649/= being an alleged VAT assessment for the period 2021, which conduct amounted to a violation of the Appellant's Legitimate expectations and Fair Administrative Action.

46. That the Respondent's refusal to consider all the explanations and documentations supplied lo it by the Appellant was because the Respondent already had a predetermined and predisposed mind against the Appellant and lacked the objectivity required of his office and thus failed to not only consider the Appellant’s grounds but did not call upon the Appellant to supply nor clarify on the documents submitted yet VAT Schedule reconciliation was duly filed by the Appellant.

47. That the Respondent erred both in fact and in law in disallowing all the Appellant's input purchases claims for the period 2020 incurred within the Appellant's course of business towards construction of premises on LR. NO. KAJIADO/Kaputei North/6419 and 6420 situated in Kajiado County despite availability of ETR receipts filed by the suppliers and they relate to construction of commercial premises where the Appellant pays rental taxes.

48. That the Respondent erred both in fact and in law in disallowing the Appellant's tax on Motor Vehicle No. KCZ 565M for Kshs. 5,953,157/= claimed on the cost of imported motor vehicle-(Ref: Import Invoice no. 7603770) yet evidence adduced to the Respondent showed that the motor vehicle in question was bought for official use by the Appellant as the proprietor and registered as KCZ565M under his name wholly used to run his commercial premises and professional services despite availability of a copy of the invoice, tax payment receipts, logbook and insurance sticker.

49. That the Respondent erred both in fact and in law in disallowing all the Appellant's motor vehicle expenses of Kshs. 726,616/= for the period 2020, depreciation of plant and equipment of Kshs. 1,005,480/ for 2019 and repairs and maintenance of Kshs. 353,814/= for the year 20 I 9 yet the above three costs and expenses claimed are allowable expenses and have been incurred in the course of generation the taxable income and tax law has standard rates applicable on capital assets for wear and tear allowable expense claims which rates were applied

50. That the Respondent's refusal to allow the Appellant's claim on depreciation on motor vehicle and equipment and demanding receipts on the same is a further manifestation that the Respondent had a predetermined subjective attitude against the Appellant since the law already has tax rates for depreciation and the same arises out of use and time and are not capable of being receipted.

51. That the Respondent erred both in fact and in law in disallowing all the Appellant's research costs for the Year 2020 of Kshs. 46,650,055/= associated with his legal practice and thus arrived at an irrational and impractical decision that the Appellant's legal practice did not incur any cost to generate the taxable

52. That the Respondent erred both in fact and in Law in failing to properly consider and evaluate the totality of the evidence and documents adduced before it by the Appellant before arriving at its decision.

53. That the Respondent erred in law by failing to fairly and objectively consider the objection raised by the appellant and predisposed his mind to a position in favour of a finding that the appellant owed the amount demanded in the Assessment.

54. That the Appellant relied on the annexed documents in support of this Appeal and prays that the Appeal be allowed.

The Appellant’s Prayers 55. The Appellant prayed that the Respondent’s objection decision dated 24th August 2022 be set aside and the Appellant’s Objection filed on 15th December 2021 be deemed to have been allowed by the operation of law.

The Respondent’s Case 56. The Respondent’s case is premised on its Statement of Facts dated and filed on 14th April 2022 and the written submissions dated 28th April 2023 and filed on 29th April 2023.

57. The Respondent stated that the dispute arose from assessments issued to the Appellant based on noted variances between sales declared in his VAT and income -tax returns for the period 2018-2020 as shown below;Tax Head Principal Tax Penalty Interest Total

Income Tax 18,286,617 3,657,323 597,533 22,541,473

VAT 20,013,246 1,000,662 1,186,980 22,200,888

Total 38,299,863 4,657,986 1784,513 44,742,361

58. The Respondent averred that the decision to arrive at the confirmed assessments was justified and was in conformity with law under the Income Tax Act, VAT Act and the Tax Procedures Act.

59. The Respondent relied on the following statutes for its defence:i.Section 5 of VAT Act,ii.Section 17 of VAT Actiii.Section 3 of the Income Tax Act-ITAiv.Section 15 of the Income Tax Act- ITAv.Section 51 of Tax Procedure Act- TPA

60. The Respondent averred that it charged VAT on variances between sales declared in the income tax and VAT returns for the period 2018 to 2020. The Respondent also charged VAT assessment on disallowed purchases claims in the period 2020 to 2021, which comprised on construction materials.

61. The Respondent further stated that, it charged Corporation tax on variances between sales declared in the IT2C returns for the period 2020.

62. The Respondent stated that it disallowed various expenses claimed in the Appellant’s income tax returns that the Appellant failed to adequately support.

63. The Respondent stated that contrary to the Appellant’s assertions, the Appellant upon filing his objection did not provide the requisite documents to support the objection/ which documents could adequately be reviewed by the Respondent.

64. The Respondent averred that the Appellant provided documents in piecemeal with documents being provided on various dates from 9th February 2022 with the last document being received on 8th August 2022.

65. The Respondent stated that before the commencement of the Finance Act 2022 in June 2022, Section 51(11) of the Tax Procedures Act provided that the Respondent shall make the objection decision within sixty days from the date of receipt of –a)the notice of objection; orb)any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.

66. The Respondent stated that this was the proviso of the law that the Respondent relied upon and therefore, the Respondent was well within the confines of the law in issuing its objection decision on 29th August 2022.

67. The Respondent stated that Section 59 of the Tax Procedures Act empowers the Respondent or require production of such documents vide issuance of notice as deemed necessary in determination of tax liability. The Section provides as follows:-“For the purpose of obtaining full information in respect of the income of a person or class of persons, the Commissioner may, by notice in writing, require, in the case of the income of a person, that person or any other person, and in the case of a class of persons, any person –a.to produce for examination by the Commissioner at the time and place specified in the notice, any accounts, books of account, and other documents which the Commissioner may consider necessary; and the Commissioner may inspect such accounts, books of accounts or other documents and may take copies of any entries therein.”

68. The Respondent stated that in the review of the Appellant’s records, the Respondent incorporated all the Appellant’s income and the purchases/ expenses incurred in the production of those incomes as guided by Section 3 of the Income Tax Act, Section 15 of the Income Tax Act, Section 5 of the VAT Act and Section 17 of the VAT Act.

69. The Responded stated that in applying Vat on non-vatable income being commissions and agency fees earned by the taxpayer in the years 2018 and 2019, the Respondent averred that the Appellant is a registered person for the purpose of VAT therefore, any commissions are not exempt income and thus VAT should have been charged on the same

70. The Respondent averred that its decision was based on facts and documents submitted.

71. That the Appellant’s allegations as laid out in the Memorandum of Appeal and Statement of Facts unless where in agreement by the Respondent are unfounded in law and not supported by evidence and are expressly denied.

72. The Respondent submitted that from the Appellant’s grounds of Appeal, the following are the issues for determination: -a)Whether the objection decision is valid.b)Whether the Respondent’s assessments for Income Tax and VAT of Kshs. 44,742,361. 00 were justified.

73. On the issue of whether the objection decision is valid the Respondent submitted that contrary to the Appellant’s assertions, the objection decision issued by the Respondent on 29th August 2022 is valid and within the confines of the applicable law as at that time.

74. The Respondent submitted that upon filing his objection on 15th December 2021, the Appellant did not provide the requisite documents to support the objection/ which documents could adequately be reviewed by the Respondent.

75. That this already meant that the said objection was not in conformity with Section 51(3) of the Tax Procedures Act which is a clear proviso on what constitutes a valid objection.

76. The Respondent further submitted that Section 51(3) of the Tax Procedures Act provides as follows:“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) as follows-a)the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;b)in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1); andc)all the relevant documents relating to the objection have been submitted .”

77. The Respondent submitted that the provisions of Section 51(3) are couched in mandatory terms and in the absence of conformity to the same then the objection is invalid

78. The Respondent cited the case of Nanku Company (Kenya) Limited v Commissioner of Domestic Taxes TAT No. 205 of 2020 where the Tribunal held that-“The provisions of Section 51(3) of the Act are couched in mandatory terms. The Tribunal is guided by the case of W.E.C Lines Ltd Vs Commissioner of Domestic Taxes (TAT case No. 247 of 2020) where it was held at paragraph 70 while reiterating the holding in Krystalline Salt Ltd Vs KRA(2019)eKLR where there is a clear procedure for redress of any particular grievance prescribed by the constitution or an Act of parliament, the special procedure provided by any law must be strictly adhered to since there are good reasons for such special procedures” The relevant procedure here is the process of opposing an assessment by the Commissioner.” The Tribunal in Circumstances finds that in the absence of a valid objection there was no objection that would have been considered by the Respondent to precipitate in a decision that could be escalated by an appeal to the Tribunal under section 52 of the TPA.”

79. The Respondent therefore urged the Tribunal to follow these precedents and find that the Appellant did not have a valid objection.

80. The Respondent reiterated that it sent further requests for additional documents from the Appellant in a bid to issue a fair review of the objection.

81. The Respondent averred that the Appellant provided documents in piecemeal, with documents being provided on various dates from 9th February 2022 with the last document being received by the Respondent on 8th August 2022.

82. That before the commencement of the Finance Act 2022 in June 2022, Section 51(11) of the Tax Procedures Act provided that the Respondent shall make the objection decision within sixty days from the date of receipt of—a.The notice of objection; orb.Any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.

83. That this was the proviso of the law that the Respondent relied upon and therefore, the Respondent was well within the confines of the law in issuing its objection decision on 29th August 2022.

84. That moreover, Section 59(1) of the Tax Procedures Act empowers the Respondent or require production of such documents vide issuance of notice as deemed necessary in determination of tax liability. The Section provides as“(1)For the purpose of obtaining full information in respect of the income of a person or class of persons, the Commissioner may, by notice in writing, require, in the case of the income of a person, that person or any other person, and in the case of a class of persons, any person –a.to produce for examination by the Commissioner at the time and place specified in the notice, any accounts, books of account, and other documents which the Commissioner may consider necessary; and the Commissioner may inspect such accounts, books of accounts or other documents and may take copies of any entries therein.”

85. The Respondent submitted that contrary to the Appellant’s assertions the objection decision dated 29th August 2022 is valid and was issued within the timeframes allowed by the then Section 51(11) of Tax Procedures Act and it urges the Tribunal to so find.

86. On whether the Respondent's assessments for income tax and VAT of Kshs. 44,742,361. 00 were justified, the Respondent submitted that it charged VAT on variances between sales declared in the income tax and VAT returns for the period 2018 to 2020. The Respondent also charged VAT assessment on disallowed purchases claims in the period 2020 to 2021, which comprised on construction materials.

87. The Respondent charged Corporation tax on variances between sales declared in the IT2C returns for the period 2020.

88. The Respondent disallowed various expenses claimed in its income tax returns that the Appellant failed to adequately support

89. The Respondent averred that for expenses to be deductible under Section 15 of the Income Tax Act, the same must be supported/ evidence of the said expenses must be provided. The Appellant failed to do so in this case and therefore the Respondent disallowed the same.

90. The Respondent averred that for VAT, the Appellant is a registered person for the purpose of VAT. Therefore, any commissions and agency fees earned by the Appellant are not exempt income and thus VAT should have been charged on the same

91. The Respondent avered that its decision to demand additional taxes was based on facts and documents submitted.

92. The Respondent submitted that it is not in dispute that despite several requests and reminders from the Respondent, the Appellant failed to provide sufficient documentation to disprove the assessments.

93. That the Appellant thus failed to discharge its burden under Section 56 of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act. Section 56 (1) of the Tax Procedures Act, 2015 provides that:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

94. The Respondent submitted that the Courts have made several pronouncements in support of this position of the law.

95. In support of its decision the Respondent relied on the case of Republic v Kenya Revenue Authority; Proto Energy Limited (Exparte) (Judicial Review Application E023 of 2021) [2022] where the court stated that:-“The most significant justification for placing the burden of proof on the tax payer is the practical consideration that the Commissioner cannot sustain the burden because he does not possess the needed evidence. Under the system of self-reporting tax liability, the taxpayer possesses the evidence relevant to the determination of tax liability. It is simply fair to place the burden of persuasion on the taxpayer, given that he knows the facts relating to his liability, because the commissioner must rely on circumstantial evidence, most of it coming from the taxpayer and the taxpayer's records. The taxpayer must present a minimum amount of information necessary to support his position”

96. The Respondent further submitted that this was also the position upheld by the Court in Income Tax Appeal E088 of 2020: Commissioner of Domestic Taxes vs. Galaxy Tools Limited and it urged the Tribunal to hold that in the absence of the Appellant providing additional documents to prove that the assessments were incorrect or excessive, then the assessments as issued were justified.

The Respondent’s prayers 97. The Respondent prayed that the Honorable Tribunal finds as follows;a.The Respondent’s Objection decision dated 29th August 2022 to be upheld and that the taxes amounting to Income tax and VAT assessments of Kshs. 44,742,361. 00 be paidb.The Appeal be dismissed with costs borne by the Appellant.

Issues for Determination 98. Gleaning through the Memorandum of Appeal, the parties’ Statement of Facts and the Respondent’s submissions, the Tribunal puts forth the following issue for determination: -a)Whether the Respondent’s Objection Decision dated 29th August 2022 was proper in law;b)Whether the Respondent’s assessments for additional Income Tax and VAT of Kshs. 44,742,361. 00 were justified.

Analysis and Findings 99. The Tribunal wishes to analyse the issues identified as hereinunder.

a. Whether the Respondent’s Objection Decision dated 29th August 2022 was proper in law; 100. The Appellant stated that on 23rd August 2021 he received a notice from the Respondent to assess undisclosed business income and Underdeclared Value Added Tax. On 30th August 2021 he replied to the Respondent’s notice and attached the relevant documents explaining his tax filings.

101. The Appellant stated that while waiting for any further engagement from the Respondent or further clarifications if need be the Appellant was shocked to receive in his iTax account on 12th December 2021 a letter dated 5th October 2021 from the Respondent informing the Appellant that the Respondent had completed its review and assessed an additional tax due from the Appellant of Kshs 44,742,361. 00 for the period January 2018 to December 2020 and demanded the Appellant pays the same in 30 days.

102. That upon receipt of the assessment from the Respondent on 12th December 2021, the assessment of tax dated 5th October 2021, he proceeded to lodge a notice of objection to the assessment on 15th December 2021 in accordance with Section 51(2) of TPA states, which provides as follows:-“A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.”

103. Section 51(7) of TPA states as follows with regard to late notices of objection:-“The Commissioner may allow an application for the extension of time to file a notice of objection if—(a)the taxpayer was prevented from lodging the notice of objection within the period specified in subsection(b)because of an absence from Kenya, sickness or other reasonable cause; and(c)the taxpayer did not unreasonably delay in lodging the notice of objection.”

104. The Tribunal notes that the Respondent is silent on this issue of late objection and did not adduce any evidence in its pleadings as to the validity or invalidity of the Appellant’s late notice of objection and the Tribunal therefore concludes that the Respondent accepted the late objection as per Section 51(7) ( c ) which reads as thus:-“(c)the taxpayer did not unreasonably delay in lodging the notice of objection.”

105. The validity of a notice of objection is provided for under Section 51(3) of the Tax Procedures Act as follows;“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—(a)the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;(b)in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1); and(c)all the relevant documents relating to the objection have been submitted.”

106. The Tribunal in its Judgment in Tax Appeal Number. 291 of 2021 Hasus Energy Limited Vs Commissioner of Domestic Taxes paragraph 51 and in an attempt to interpret Section 51(2) & (3) of the Tax Procedures Act stated as thus:-“for an Objection to be considered validly lodged a Notice of objection must contain the following elements:i.It must be in writing;ii.It must be lodged with the Commissioner within thirty days of the taxpayer being notified of the tax decision;iii.It must state the grounds of objection;iv.It must state the amendments required to be made to correct the decision; andv.It must state the reasons for the amendments;”

107. The Tribunal notes that the Appellant submitted the notice of objection in writing and as stipulated in Section 51(2) & (3) of the Tax Procedures Act and also provided the Respondent with all the documents requested from the day it got knowledge of the notice of assessment (12th December 2021), documents which were relied on by the Respondent to raise its assessment. In particular the Appellant states that the documents were submitted vide his letter dated 15th December 2021.

108. In addition, the Appellant stated in his pleadings that the effect of the Respondent failing to respond to the Objection lodged by the Appellant within 60 days from 15th December 2021, resulted in the Objection being allowed by operation of the law pursuant to Section 51 (11) of the Tax Procedures Act.

109. The Respondent on the other hand submitted that upon the Appellant filing his objection on 15th December 2021, he did not provide the requisite documents to support the objection which documents could adequately be reviewed by the Respondent.

110. The Respondent further submitted that this meant that the said objection was not in conformity with Section 51(3) of the Tax Procedures Act which has a clear provision on what constitutes a valid objection.

111. The Respondent submitted on several authorities and cases to support its position and in particular TAT No. 205 of 2020 – Nanku Company (Kenya) Limited –vs- Commissioner of Domestic Taxes where the Tribunal found that in the absence of a valid objection there was no objection that could have been considered by the Respondent to precipitate in a decision that could be escalated by an appeal to the Tribunal under Section 52 of the TPA.

112. The Respondent also quoted Section 51 (11) of the Tax Procedures Act, as amended on 7th November 2019 in the Finance Act of 2019 and was in effect up to and including 30th June 2022, which states as follows;“(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of—(a)the notice of objection; or(b)any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

113. The emphasis on this Section is 60 days and which is the bone of contention in this Appeal. The question is “when did the clock start ticking and when did it stop” for both the Appellant and the Respondent as provided in the Tax Procedure Act 2015 under Section 51(11) thereof.

114. The Respondent argued that after the notice of objection was lodged on 15th December 2021, it was in constant communication with the Appellant. It averred that the Respondent sent further requests for additional documents from the Appellant in a bid to issue a fair review of the notice of objection.

115. To support its argument the Respondent submitted that that upon filing his objection on 15th December 2021, the Appellant did not provide the requisite documents to support the objection/ which documents could adequately be reviewed by the Respondent. Therefore, the notice of objection dated 15th December was not validly lodged and was not in conformity with Section 51(3) of the Tax Procedures Act which has a clear provision on what constitutes a valid objection.

116. The Respondent also quoted Section 59 of the Tax Procedures Act which empowers the Respondent or require production of such documents vide issuance of a notice as deemed necessary in determination of a tax liability and in particular Section 59(1) which states;“(a)to produce for examination by the Commissioner at the time and place specified in the notice, any accounts, books of account, and other documents which the Commissioner may consider necessary; and the Commissioner may inspect such accounts, books of accounts or other documents and may take copies of any entries therein.”

117. The Respondent submitted that the Appellant provided documents in piecemeal, with documents being provided on various dates after the Appellant lodged the notice of objection in writing on 15th December 2021 and that these documents were submitted in piecemeal between 9th February and 9th August 2022.

118. The Respondent also relied on Section 51 (11) (b) of the Tax Procedures Act 2015 as amended by the Finance Act of 2019 in arguing that the effective law at that time provided that the Respondent issues a notice of objection within 60 days of receipt of a valid notice of objection. The valid notice of objection according to the Respondent was accepted on 9th August 2022 when the final documents were submitted and not 15th December 2021 as alleged by the Appellant.

119. The Tribunal notes that in their pleadings, both the Respondent and the Appellant have not provided evidence to confirm the events between 15th December 2021 when the Appellant lodged a notice of objection notice and the 29th August 2022 when the Respondent issued the Objection decision and demanded the additional taxes.

120. In the absence of this evidence the Tribunal can only conclude that the communication between the Respondent and the Appellant was mainly verbal and therefore not in conformity with the provisions of Section 51(3) and Section 51(11) of the Tax Procedures Act stated above.

121. In its review of the evidence provided, the Tribunal has narrowed down the contentious issue to be procedure of tax assessments, notices of objection and Objection decisions as laid down in the Tax Procedure Act and in particular Section 51(2), (3) and (4) of the Tax Procedures Act.

122. Section 51(4) states as follows:-“Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall immediately notify the taxpayer in writing that the objection has not been validly lodged.”

123. The Tribunal finds that the Respondent’s failure to respond in writing on receipt of the notice of objection from the Appellant received on 15th December 2021 and validate or invalidate the objection within 60 days of the lodging of the notice of objection that is from 15th December 2021, meant that the objection filed by the Appellant was allowed by operation of the law under Section 51(11) of the Tax Procedures Act.

124. The Tribunal has taken into consideration the decision in the case of W.E.C. Lines Ltd vs. the Commissioner of Domestic Taxes [TAT CASE NO.247 of 2020] on the issue of observing procedures and set statutory timelines where it was held at Paragraph 70 and reiterating the holding in Krystalline Salt Ltd vs. KRA [2019] eKLR that“Where there is a clear procedure for redress of any particular grievance prescribed by the constitution or an Act of Parliament, that procedure should be strictly followed. Accordingly, the special procedure provided by any law must be strictly adhered to since there are good reasons for such special procedures.”

125. The Tribunal also relied on Section 107 of the Evidence Act which provides that:“Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.”

126. This position was upheld in Kenya Power & Lighting Co Ltd v Rassul Nzembe Mwadzaya [2020] eKLR where the court stated as thus:-“Since no evidence was adduced in support of the defence case, the defence on record therefore remained as a mere allegation. This is the position in law and was restated in the case of Edward Muriga through Stanley Muriga…Vs…Nathaniel D. Schluter, Civil Appeal No.23 of 1997, where the Court of Appeal stated: -“In this matter, apart from filing its statement of defence the Defendant did not adduce any evidence in support of assertions made therein. The evidence of the 1st Plaintiff and that of the witness remain uncontroverted and the statement in the defence therefore remains mere allegations.”

127. The Appellant had specifically raised as a ground of appeal the issue of the objection decision having been rendered outside the statutory timelines and to that extent the Respondent ought to have led evidence to demonstrate that it indeed requested for additional information from the Appellant that enhanced the timelines within which to issue the Objection decision.

128. The Tribunal upon taking into consideration all the evidence in this matter and the laws and authorities finds that the Respondent did not comply with the specific requirements as set out in The Tax Procedure Act No 29 as amended on 7th November 2019 (Finance Act 2019) and was in effect up to and including to 30th June 2022, and in particular Section 51 (2), (3)(4) and (11) of the Tax Procedures Act 2015 regarding the process of assessment, notices of objection and objection decisions.

129. The Tribunal therefore finds that the Respondent’s assessment of tax dated 5th October 2021 was proper in law. However, the Respondent failed to validate or invalidate the same tax Assessment in writing and within the stipulated timelines of 60 days after receipt of the notice of objection submitted by the Appellant on 15th December 2021. Therefore, it failed to proof that there was a valid objection decision in law.

b) Whether the Respondent’s assessments for additional Income Tax and VAT of Kshs. 44,742,361. 00 were justified. 130. Having concluded that there was no valid objection decision before the Tribunal, the Tribunal will not delve into the above issue that fell for determination as it has been rendered moot.

Final Decision 131. The upshot to the foregoing is that the Appeal is merited and the Tribunal consequently makes the following Orders;-a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision to Income Tax individual and VAT for the period January 2018 to December 2020 of Kshs 44,742,361. 00 dated 29th August 2022 be and is hereby set aside.c.Each party to bear its own costs.

132. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF FEBRUARY, 2024. ERIC NYONGESA WAFULA - CHAIRMANDR RODNEY O. OLOUCH - MEMBERCYNTHIA B. MAYAKA - MEMBERABRAHAM K. KIPROTICH - MEMBEREUNICE NG’ANG’A - MEMBERBERNADETTE GITARI - MEMBER